Hierarchies for Flow and Profit

Indeed, the secret to determining the appropriate number of layers is to plot accountabilities from the front line — in most cases, the customer — back into the organization, to figure out which jobs are essential to providing customers with the best service and the products that they prefer. Unfortunately, most companies are instead organized from the top down. The hierarchy is designed to reduce complexity for the top layers rather than to add value to the work of those in the other layers or to the consumer.

In an accountable organization, a leader makes only those decisions that cannot be made by his or her direct reports — because they do not have the knowledge, skill, or experience to do so. Each layer includes only those who have the extra capability needed to deal with decisions of greater complexity than those at the level below can master. I have learned, over 40 years of organizational fieldwork in about 70 countries across 20 different industries, including the public sector, that each step change in complexity above the front line needs only one layer of hierarchy. And step changes in complexity are relatively few in number; I have yet to find an orga­nization that justifies more than seven layers of management above the front lines. This observation is borne out by the work of many others in the field, including the fundamental research of management theorist Elliott Jaques. (See “Elliott Jaques Levels with You,” by Art Kleiner, s+b, First Quarter 2001.)

Designing for flow and accountability is counterintuitive for many companies, and it takes a bit of practice to get used to it. The first level of accountability often requires a role of supervisor to support the immediate line leader, the manager in level two. A third-level leader could be a business unit leader, a plant manager, or a regional manager. In most organizations, about 98 percent of employees reside in one of these first three levels, and an individual at any one of the first three levels should be able to effectively manage up to 1,000 employees.

There is a widespread tendency to build unnecessary tiers of supervisors in level one. This is usually due to faulty assumptions about how many people can be managed by one person, further complicated by poorly designed roles in which distinctions between supervisory and management accountabilities are confused. For example, one company that I observed had a hierarchy in its customer call center de­signed on the premise that any one individual could effectively super-vise 10 people at most. This as­sumption stemmed from a recently introduced appraisal system adapted from the system used for top management, but far too complicated to be appropriate for the front line. The result was a bureaucracy of busy people, snowed under with paperwork, driven by an appraisal system in which supervisors spent hours each month checking with colleagues about whether their frontline staff “lived the corporate values” and a customer complaints process far too cumbersome to in-fluence the company’s products or services.

There is no one-size-fits-all so­lution to organizational design for flow. But rules of thumb are emerging. For example, most organizations should not build operational units such as hypermarkets, factories, or call centers with more than 1,200 employees; these are apt to be unmanageable. On the other hand, a call center or factory with fewer than 200 employees is probably too small; it hardly justifies the layers of management needed to oversee it. Like the physical architecture of buildings, the architecture of orga­nizations has a “golden mean.” We may not always find it easy to achieve, but we know it when we feel it. We can recognize it in the sense of fulfillment, collegiality, and harmony that naturally arises from proper flow and accountability when an organization’s hierarchy is in balance.

Articles published in strategy+business do not necessarily represent the views of PwC Strategy& LLC or any other member firm of the PwC network. Reviews and mentions of publications, products, or services do not constitute endorsement or recommendation for purchase.